You are performing a review for a company with a plant that uses many different types of metals, including steel, aluminum, and copper. As part of your inquiry, you ask about the inventory and control of scrap. The plant manager says: “We don’t inventory scrap, but I know where it is. We accumulate it in separate bins for each type of metal. When the bins are full, I call the scrap dealer and he gives me cash for what it is worth and a journal entry is made when the cash is deposited.” You feel uneasy, but another person working on the engagement, Vince Easton, suggests that scrap is less than 0.5% of inventories and that your inquiry about scrap has achieved the limited assurance level that there are not material modifications that should be made to the financial statements to be in conformity with GAAP.

(a) If you accept Vince’s premise and also know that the internal controls for the company are good overall, what procedures, at a minimum, should you consider to validate your questions?
(b) If you feel that the company may have no basis to know the true total value of the scrap, and without that knowledge, cannot conclude about the magnitude of any potential modifications to the financial statements, what are some of the questions you should ask as part of your additional inquiry?

  • CreatedJanuary 21, 2015
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